Crestglen Investments Ltd. v. MNR, 93 DTC 462, [1993] 2 CTC 3210 (TCC)

Hamlyn, T.C.C.J.:—For the taxation years 1982, 1983 and 1984 the shareholders of the appellant corporation (the "corporation") were Mayer Cytrin, Cipora Offman and Harry Offman. Mayer Cytrin held 50 per cent of the common shares; Cipora Offman and Harry Offman each held 25 per cent of the common shares. All three of these individuals were also directors of the corporation and Mayer Cytrin and Cipora Offman were both officers. In addition, Cipora Offman maintained the office for the corporation at her residence.

The three shareholders asserted they also carried on business as two partnerships (the "partnerships"). The partnerships purchased two shopping plazas and retained the appellant to manage these plazas. The duties were performed by Cipora Offman.

When the appellant filed its income tax returns for its 1982, 1983 and 1984 taxation years, it characterized the income generated as "active business income" and applied the small business deduction. The Minister of National Revenue (the "Minister") stated the income derived was not income from an active business but rather from a "personal services business” or a "nonqualifying business”; therefore the Minister disallowed the small business deduction.

Issue

Whether the appellant's income is derived from an "active business” or from a "personal services business” or from a "non-qualifying business”.

Facts

From the amended notice of appeal, the following was admitted by the respondent:

1. The appellant is a corporation incorporated under the laws of the Province of Ontario on July 13, 1978.

2. Paragraph 6(a) of the articles of incorporation of the appellant provides that among other powers the appellant's objects for which it was incorporated are:

(a) To purchase, lease or otherwise acquire, to hold, rent, operate, manage, develop or otherwise use and to sell, exchange or otherwise dispose of real property, improved or unimproved, and to mortgage the same; and to acquire, construct, operate, manage, sell or otherwise dispose of buildings and structures of all kinds and to deal in and with building materials and supplies.

3. At all material times the shareholders of the appellant were as follows:

Mayer Cytrin	—	20 common shares
Cipora Offman	—	10 common shares
Harry Offman	—	10 common shares

4, At all material times the directors and officers of the appellant were as follows:

Directors:	Mayer Cytrin
	Cipora Offman (daughter of Mayer Cytrin)
	Harry Offman (husband of Cipora Offman)
Officers:	Mayer Cytrin, President
	Cipora Cytrin, Secretary

5. At all material times Cipora Offman ("Cipora") was employed as the general manager of the appellant, with specific duties to carry out certain management functions on behalf of the appellant as hereinafter described.

8. The Crestview Plaza was acquired on July 14, 1978, and the Fairwood Plaza was also acquired on July 14, 1978 (herein collectively referred to as the "Plazas").

19. At all material times the appellant maintained an office in the residence of Cipora at 84 Kentland Crescent, Willowdale, Ontario.

25. The Minister confirmed the reassessments on August 9, 1989 by way of notice of confirmation.

26. The appellant objects to the said reassessments.

From the respondent's assumptions in the amended reply to notice of appeal, the following was admitted by the appellant:

20(b) during the taxation years under appeal, the appellant was a Canadian controlled private corporation;

(c) the appellant had income during the 1982, 1983 and 1984 taxation years, which it claimed to be income from an active business carried on in Canada in those taxation years, in the net amounts of $36,519.95, $62,547.22, and $99,742.65;

(d) 21 per cent of the net amounts referred to in paragraph 11(c) herein is $7,669.19, $13,134.92 and $20,945.96, respectively;

(g) Cipora Offman performed services to the partnership on behalf of the appellant during the 1982, 1983 and 1984 taxation years;

(h) during the 1982, 1983 and 1984 taxation years Cipora Offman was a taxpayer who owned not less than 10 per cent of the issued shares of any class of the capital stock of the appellant;

(i) Cipora Offman was, during the 1982, 1983 and 1984 taxation years, a specified shareholder of the appellant;

(1) The appellant did not employ in its business throughout the 1982, 1983 and 1984 taxation years more than five full time employees who were not specified shareholders of the appellant;

(m) the amounts paid or payable to the appellant in the 1982, 1983 and 1984 taxation years for the services was not received or receivable by it from a corporation with which it was associateclin those years;

At trial, the following facts were admitted or proven.

The three shareholders carried on business through two separate partnerships during the taxation years in question. Each of the partnerships acquired the beneficial ownership of shopping plazas namely, the Crestview Plaza and the Fairview Plaza on July 14, 1978. Title to the plazas was held by the appellant as a bare trustee for the two separate partnerships. The two partnerships maintained separate bank accounts, separate financial reporting, separate equity accounts. The partnerships entered into two separate management arrangements with the appellant. The appellant supplied administrative management services to the two partnerships including leasing services, liaison services with tenants and lawyers, rent collection, maintenance and repair arrangements, record keeping and credit and banking arrangements for each partnership.

For the years 1983 and 1984 a separate management fee was paid by the partnerships to the appellant and for each of these two years no more than 66 /3 per cent of the appellant's aggregate income which was derived from services performed by the appellant for the two partnerships was derived from either one of the two partnerships. For 1982 one management fee was paid to the appellant by one partnership (Crestview Plaza) thus more than 66 2/3 per cent of the appellant's aggregate income was derived from one source.

The appellant carried out the duties under the management arrangements through Cipora Offman. For her services rendered, Cipora Offman was allocated annually, by journal entry, a fee on the books of the appellant. The fee was determined after the end of each tax year.

All the books of account for each of the partnerships were separately maintained by the appellant on behalf of the partnerships. Separate financial statements were prepared and maintained for each partnership.

The respondent challenged the weight that should be given to the evidence because little documentary evidence was supplied by the appellant. However, the two witnesses who testified on behalf of the appellant (Cipora Offman and the accountant retained at that time) had knowledge of how the books were kept and what arrangements existed.

Legislation

The relevant provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the 1982-1984 taxation years are found at subsection 125(6), which reads in part as follows:

125(6) In this section and section 129,

(d) "active business” carried on by a corporation in a taxation year means the business of manufacturing or processing property for sale or lease, mining, operating an oil or gas well, prospecting, exploring or drilling for natural resources, construction, logging, farming, fishing, selling property as a principal, transportation or any other business carried on by the corporation other than a specified investment business, a non-qualifying business or a personal services business;

(f) "non-qualifying business” carried on by a corporation in a taxation year means

(i) the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor,

(ii) a business of providing services if more than 66 /3 per cent of the gross revenue for the year of that business derived from services

(A) is derived from services provided to, or performed for or on behalf of, one entity, and

(B) can reasonably be attributed to services performed by persons who are specified shareholders of the corporation or persons related thereto

unless the corporation employs in the business throughout the year more than five full-time employees who are not specified shareholders of the corporation or persons related thereto, or

(iii) a business the principal purpose of which is to provide managerial, administrative, financial, maintenance or other similar services, to lease property (other than real property), or to provide any such services and to lease property (other than real property), to one or more businesses connected at any time in the year with the corporation;

but does not include a personal services business;

(g.1) personal services business” carried on by a corporation in a taxation year means a business of providing services where

(i) an individual who performs services on behalf of the corporation (in this paragraph and paragraphs 8(3)(a.1) and 18(1)(p) referred to as an "incorporated employee”), or

(ii) any person related to the incorporated employee

is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the entity to which the services were provided but for the existence of the corporation, unless

(iii) the corporation employs in the business throughout the year more than five full-time employees who are not specified shareholders of the corporation or who are not related to any specified shareholder of the corporation, or

(iv) the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year.

For the 1982-84 taxation years (the years in question) the term specified shareholder” is defined in paragraph 125(9)(c), which provides in part:

(c) "specified shareholder" of a corporation in a taxation year means a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10 per cent of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation and for the purposes of this definition. . . .

Jurisprudence

Personal services business

The principles enunciated by the Federal Court of Appeal in Wiebe Door Services Ltd. v. M.N.R., [1986] 2 C.T.C. 200, 87 D.T.C. 5025, are applicable to the determination of whether a person is an independent contractor or an employee.

David T. McDonald Co. v. M.N.R., [1992] 2 C.T.C. 2607, 92 D.T.C. 1917, applied the principles enunciated in Wiebe Door, supra, in deciding whether certain corporations were in the "personal services business”. The principles are concisely set out by Judge Mogan of this Court at page 2613 (D.T.C. 1922):

MacGuigan, J. writing for the Court held at page 205 (D.T.C. 5029) that Lord Wright's test in the Montreal Locomotive Works case (control, ownership of tools, chance of profit, risk of loss) was not really a fourfold test but a four-in-one test requiring an overview of the combined force of the whole scheme of operations.

Also in relation to the same issue, Judge Dussault of this Court in Société de Projets ETPA v. M.N.R., [1993] 1 C.T.C. 2292 held:

While the issue here is the answer to a theoretical question respecting the application of a legislative provision concerning income tax, I believe that the approach adopted by the Federal Court of Appeal in Wiebe Door Services, supra, and reiterated in Moose Jaw Kinsmen Flying Fins, [1988] 2 C.T.C. 2377, 88 D.T.C. 6099 (T.C.C.), must be followed.

Analysis

Whether Cipora Offman would reasonably be regarded as an officer or employee of the partnerships but for the existence of the appellant must be looked at in terms of the facts and the legislative and jurisprudential definitions.

In the present case Cipora Offman performed services as general manager on behalf of the appellant corporation and therefore she is referred to as the "incorporated employee" for the purposes of paragraph 125(6)(g.1) analysis. Cipora Offman also owned 25 per cent of the shares of the appellant corporation and was therefore a "specified shareholder". She was also the corporate secretary of the appellant.

Cipora Offman managed the plazas through the appellant and she exercised her management skills without any direct controls on how she performed her tasks. The services were rendered from an office located in her residence. These management services were fully supplied to the partnerships businesses with no assistance from the partnerships. The sums allotted to her by the appellant were determined at the taxation years' end and were done by way of book entries to her credit. There does not appear from the evidence to be any wage or stipend guarantee to her allotment nor any specific method of determining the allocation.

Contract of service

Given the lack of employer controls, the presence of remuneration risk, the inexactitude of remuneration, the incorporated employee providing her own workplace and the services rendered being the total property management service to each of the partnership entities, Cipora Offman was not under a contract of service. The overall assessment is that the incorporated employee is neither employed under a contract of service with the partnership entities nor could she be reasonably regarded as being employed under such a contract of service.

Partner as an employee

Moreover, a partnership is not a distinct legal entity apart from the partners. A partner cannot be both the employer and the employed in the same partnership business. The tax treatment of a partner's partnership income is the same whether it is partnership distribution or moneys allocated for partnership management services. Thus a partner cannot be an employee of a partner- ship[Re Thorne and N.B. Workmen's Comp. Bd. (1962), 48 M.P.R. 756 (N.B.C.A.), aff'd orally by the Supreme Court of Canada] that is capable of entering into a contract of employment with the partnership and as a consequence an incorporated employee could not become an employee of a partnership that the incorporated employee was a partner.

Office (officer)

The term "office" is defined by the Act (subsection 248(1)) as "the position of an individual entitling him to a fixed or ascertainable stipend or remuneration and includes . . . a corporation director". The corporate secretary of the appellant (Cipora Offman) is a director and an officer of the appellant. At common law, a partnership relationship, in the absence of any agreement to the contrary, as such does not have "officers". Thus, on the facts, she did not occupy an office in the sense of the Act and as such could not be reasonably regarded as an officer of the entity (partnership(s)) within the meaning of paragraph 125(6)(g.1).

Non-qualifying business

The conclusion from the evidence is that the appellant provided services to two businesses that is, two business entities carried on by three persons in each case with a view to profit. "Entity" under the Act includes a partnership (paragraph 125(9)(b)). The sources of income for the appellant for the 1983 and 1984 taxation years were therefore from two partnerships. For the 1982 taxation year the income source was from one partnership. For the 1982 taxation year the corporation appellant provided service and more than 66 A per cent of the gross revenue for that taxation year was derived from one source for services provided to that source and the service was attributed to services performed by a specified shareholder of the appellant, as such, the appellant is a“ "nonqualifying business”.

For the 1983 and 1984 taxation years the appellant provided service to two sources and not more than 66 A per cent of the gross revenue was derived from one source for those taxation years. Thus for the 1983 and 1984 taxation years the appellant did not carry on a non-qualifying business and for these years was entitled to the small business deduction pursuant to subsection 125(1) of the Act.

Decision

The appeal is dismissed for the 1982 taxation year.

The appeals are allowed for the 1983 and 1984 taxation years and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that the appellant was engaged in an "active business” and therefore is entitled to the "small business deduction”.

The appellant is entitled to its costs for the 1983 and 1984 taxation years.

Appeal dismissed.